Mises Daily Articles
Public Administration is Economic Chaos
Mises's 1944 book BUREAUCRACY applies his insight concerning economic calculation to delineate the difference between bureaucratic management and profit-and-loss management in the free market. The implications of his argument are far reaching, for it shows that all types of public administration lack the ability to conduct their affairs in an economic rational manner. The entire text is made available here only through a leasing arrangement with Libertarian Press that is renewed on an annual basis at a fee. To support the continued availability of this text and others at no charge, please contribute to the Mises Institute's work. You can also purchase the book ($9) as a means of supporting this project.
Bureaucratic management means, under democracy, management in strict accordance with the law and the budget. It is not for the personnel of the administration and for the judges to inquire what should be done for the public welfare and how the public funds should be spent. This is the task of the sovereign, the people, and their representatives. The courts, the various branches of the administration, the army, and the navy execute what the law and the budget order them to do. Not they but the sovereign is policy-making.
Most of the tyrants, despots, and dictators are sincerely convinced that their rule is beneficial for the people, that theirs is government for the people. There is no need to investigate whether these claims of Messrs. Hitler, Stalin, and Franco are well founded or not. At any rate their system is neither government of the people nor by the people. It is not democratic but authoritarian.
The assertion that bureaucratic management is an indispensable instrument of democratic government is paradoxical. Many will object. They are accustomed to consider democratic government as the best system of government and bureaucratic management as one of the great evils. How can these two things, one good, the other bad, be linked together?
Moreover, America is an old democracy and the talk about the dangers of bureaucracy is a new phenomenon in this country. Only in recent years have people become aware of the menace of bureaucracy, and they consider bureaucracy not an instrument of democratic government but, on the contrary, the worst enemy of freedom and democracy.
To these objections we must answer again that bureaucracy in itself is neither good nor bad. It is a method of management which can be applied in different spheres of human activity. There is a field, namely, the handling of the apparatus of government, in which bureaucratic methods are required by necessity. What many people nowadays consider an evil is not bureaucracy as such, but the expansion of the sphere in which bureaucratic management is applied. This expansion is the unavoidable consequence of the progressive restriction of the individual citizen’s freedom, of the inherent trend of present-day economic and social policies toward the substitution of government control for private initiative. People blame bureaucracy, but what they really have in mind are the endeavors to make the state socialist and totalitarian.
There has always been bureaucracy in America. The administration of the customs and of the foreign service has always been conducted according to bureaucratic principles. What characterizes our time is the expansion of the sphere of government interference with business and with many other items of the citizenry’s affairs. And this results in a substitution of bureaucratic management for profit management.
3. THE ESSENTIAL FEATURES OF BUREAUCRATIC MANAGEMENT
The lawyers, the philosophers, and the politicians look upon the supremacy of the law from another angle than does this book. From their point of view the main function of the law is to limit the power of the authorities and the courts to inflict evils upon the individual citizen and to restrict his freedom. If one assigns to the authorities the power to imprison or even to kill people, one must restrict and clearly circumscribe this power. Otherwise the officeholder or judge would turn into an irresponsible despot. The law determines under what conditions the judge should have the right and the duty to sentence and the policeman to fire his gun. The law protects the people against the arbitrariness of those in office.
The viewpoint of this book is somewhat different. We are dealing here with bureaucracy as a principle of administrative technique and organization. This book looks upon the rules and regulations not merely as measures for the protection of the people and for safeguarding the citizen’s rights and freedom but as measures for the execution of the will of the supreme authority. The need to limit the discretion of subordinates is present in every organization. Any organization would disintegrate in the absence of such restrictions. Our task is to investigate the peculiar characteristics of bureaucratic management as distinguished from commercial management.
Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.
Business management or profit management is management directed by the profit motive. The objective of business management is to make a profit. As success or failure to attain this end can be ascertained by accounting not only for the whole business concern but also for any of its parts, it is feasible to decentralize both management and accountability without jeopardizing the unity of operations and the attainment of their goal. Responsibility can be divided. There is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.
The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods. Take a nation-wide police system like the F.B.I. There is no yardstick available that could establish whether the expenses incurred by one of its regional or local branches were not excessive. The expenditures of a police station are not reimbursed by its successful management and do not vary in proportion to the success attained. If the head of the whole bureau were to leave his subordinate station chiefs a free hand with regard to money expenditure, the result would be a large increase in costs as every one of them would be zealous to improve the service of his branch as much as possible. It would become impossible for the top executive to keep the expenditures within the appropriations allocated by the representatives of the people or within any limits whatever. It is not because of punctiliousness that the administrative regulations fix how much can be spent by each local office for cleaning the premises, for furniture repairs, and for lighting and heating. Within a business concern such things can be left without hesitation to the discretion of the responsible local manager. He will not spend more than necessary because it is, as it were, his money; if he wastes the concern’s money, he jeopardizes the branch’s profit and thereby indirectly hurts his own interests. But it is another matter with the local chief of a government agency. In spending more money he can, very often at least, improve the result of his conduct of affairs. Thrift must be imposed on him by regimentation.
In public administration there is no connection between revenue and expenditure. The public services are spending money only; the insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not "produced" by the administrative apparatus. Its source is the law, not the activities of customs officers and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.
In public administration there is no market price for achievements. This makes it indispensable to operate public offices according to principles entirely different from those applied under the profit motive.
Now we are in a position to provide a definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. Remember: we do not say that a successful handling of public affairs has no value, but that it has no price on the market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money.
If we compare the conditions of two countries, say Atlantis and Thule, we can establish many important statistical figures of each of them: the size of the area and of the population, the birth rate and the death rate, the number of illiterates, of crimes committed, and many other demographical data. We can determine the sum of the money income of all its citizens, the money value of the yearly social product, the money value of the goods imported and exported, and many other economic data. But we cannot assign any arithmetical value to the system of government and administration. That does not mean that we deny the importance or the value of good government. It means only that no yardstick can measure these things. They are not liable to an expression in figures.
It may well be that the greatest thing in Atlantis is its good system of government. It may be that Atlantis owes its prosperity to its constitutional and administrative institutions. But we cannot compare them with those of Thule in the same way as we can compare other things, for instance, wage rates or milk prices.
Bureaucratic management is management of affairs which cannot be checked by economic calculation.
4. THE CRUX OF BUREAUCRATIC MANAGEMENT
The plain citizen compares the operation of the bureaus with the working of the profit system, which is more familiar to him. Then he discovers that bureaucratic management is wasteful, inefficient, slow, and rolled up in red tape. He simply cannot understand how reasonable people allow such a mischievous system to endure. Why not adopt the well-tried methods of private business?
However, such criticisms are not sensible. They misconstrue the features peculiar to public administration. They are not aware of the fundamental difference between government and profit-seeking private enterprise. What they call deficiencies and faults of the management of administrative agencies are necessary properties. A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
There are, of course, in every country’s public administration manifest shortcomings which strike the eye of every observer. People are sometimes shocked by the degree of maladministration. But if one tries to go to their roots, one often learns that they are not simply the result of culpable negligence or lack of competence. They sometimes turn out to be the result of special political and institutional conditions or of an attempt to come to an arrangement with a problem for which a more satisfactory solution could not be found. A detailed scrutiny of all the difficulties involved may convince an honest investigator that, given the general state of political forces, he himself would not have known how to deal with the matter in a less objectionable way.
It is vain to advocate a bureaucratic reform through the appointment of businessmen as heads of various departments. The quality of being an entrepreneur is not inherent in the personality of the entrepreneur; it is inherent in the position which he occupies in the framework of market society. A former entrepreneur who is given charge of a government bureau is in this capacity no longer a businessman but a bureaucrat. His objective can no longer be profit, but compliance with the rules and regulations. As head of a bureau he may have the power to alter some minor rules and some matters of internal procedure. But the setting of the bureau’s activities is determined by rules and regulations which are beyond his reach.
It is a widespread illusion that the efficiency of government bureaus could be improved by management engineers and their methods of scientific management. However, such plans stem from a radical misconstruction of the objectives of civil government.
Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.
In the field of profit-seeking enterprise the objective of the management engineer’s activities is clearly determined by the primacy of the profit motive. His task is to reduce costs without impairing the market value of the result or to reduce costs more than the ensuing reduction of the market value of the result or to raise the market value of the result more than the required rise in costs. But in the field of government the result has no price on a market. It can neither be bought nor sold.
Let us consider three examples.
A police department has the job of protecting a defense plant against sabotage. It assigns thirty patrolmen to this duty. The responsible commissioner does not need the advice of an efficiency expert in order to discover that he could save money by reducing the guard to only twenty men. But the question is: Does this economy outweigh the increase in risk? There are serious things at stake: national defense, the morale of the armed forces and of civilians, repercussions in the field of foreign affairs, the lives of many upright workers. All these valuable things cannot be assessed in terms of money. The responsibility rests entirely with Congress allocating the appropriations required and with the executive branch of the Government. They cannot evade it by leaving the decision to an irresponsible adviser.
One of the tasks of the Bureau of Internal Revenue is the final determination of taxes due. Its duty is the interpretation and application of the law. This is not merely a clerical job; it is a kind of judicial function. Any taxpayer objecting to the Commissioner’s interpretation of the law is free to bring suit in a Federal court to recover the amount paid. Of what use can the efficiency engineer with his time and motion studies be for the conduct of these affairs? His stopwatch would be in the wrong place in the office rooms of the bureau. It is obvious that—other things being equal —a clerk who works more quickly is a more desirable employee than another who is slower. But the main problem is the quality of the performance. Only the experienced senior clerks are in a position to appreciate duly the achievements of their aides. Intellectual work cannot be measured and valued by mechanical devices.
Let us finally consider an instance in which neither problems of "higher" politics nor those of the correct application of the law are involved. A bureau is in charge of buying all the supplies needed for the technical conduct of office work. This is a comparatively simple job. But it is by no means a mechanical job. The best clerk is not he who fills out the greatest number of orders in an hour. The most satisfactory performance is to buy the most appropriate materials at the cheapest price.
It is therefore, as far as the management of government is concerned, not correct to assert that time study, motion study, and other tools of scientific management "show with reasonable accuracy how much time and effort are required for each of the available methods" and that they therefore "can show which of the possible methods and procedures require the least time and effort."2 All such things are quite useless because they cannot be coordinated to the quality of the work done. Speed alone is not a measure of intellectual work. You cannot "measure" a doctor according to the time he employs in examining one case. And you cannot "measure" a judge according to the time he needs to adjudicate one case.
If a businessman manufactures some article destined for export into foreign countries, he is eager to reduce the man hours spent for the production of the various parts of the commodity in question. But the license required for shipping this commodity abroad is not a part of the commodity. The government in issuing a license does not contribute anything to the production, the marketing, and the shipping of this commodity. Its bureau is not a workshop turning out one of the parts needed for the finishing of the product. What the government aims at in making exports depend on the grant of a license is restraint of export trade. It wants to reduce the total volume of exports or the volume exported by undesirable exporters or sold to undesirable buyers. The issuance of licenses is not the objective but a technical device for its attainment. From the point of view of the government the licenses refused or not even applied for are more important than those granted. It would therefore not be to the purpose to take "the total man hours spent per license" as the standard of the bureau’s performance. It would be unsuitable to perform "the operation of processing the licenses . . . on an assembly line basis."3
There are other differences. If in the course of a manufacturing process a piece gets spoiled or lost, the result is a precisely limited increase in production costs. But if a license application is lost in the bureau, serious damage may be inflicted upon a citizen. The law may prevent the individual harmed from suing the bureau for indemnification. But the political and moral liability of the government to deal with these applications in a very careful way remains nonetheless.
The conduct of government affairs is as different from the industrial processes as is prosecuting, convicting, and sentencing a murderer from the growing of corn or the manufacturing of shoes. Government efficiency and industrial efficiency are entirely different things. A factory’s management cannot be improved by taking a police department for its model, and a tax collector’s office cannot become more efficient by adopting the methods of a motor-car plant. Lenin was mistaken in holding up the government’s bureaus as a pattern for industry. But those who want to make the management of the bureaus equal to that of the factories are no less mistaken.
There are many things about government administration which need to be reformed. Of course, all human institutions must again and again be adjusted anew to the change of conditions. But no reform could transform a public office into a sort of private enterprise. A government is not a profit-seeking enterprise. The conduct of its affairs cannot be checked by profit-and-loss statements. Its achievement cannot be valued in terms of money. This is fundamental for any treatment of the problems of bureaucracy.
5. BUREAUCRATIC PERSONNEL MANAGEMENT
A bureaucrat differs from a non-bureaucrat precisely because he is working in a field in which it is impossible to appraise the result of a man’s effort in terms of money. The nation spends money for the upkeep of the bureaus, for the payment of salaries and wages, and for the purchase of all the equipment and materials needed. But what it gets for the expenditure, the service rendered, cannot be appraised in terms of money, however important and valuable this "output" may be. Its appraisal depends on the discretion of the government.
It is true that the appraisal of the various commodities sold and bought on the market depends no less on discretion, that is, on the discretion of the consumers. But as the consumers are a vast body of different people, an anonymous and amorphous aggregation, the judgments they pass are congealed into an impersonal phenomenon, the market price, and are thus severed from their arbitrary origin. Moreover, they refer to commodities and services as such, not to their performers. The seller-buyer nexus as well as the employer-employee relation, in profit-seeking business are purely matter of fact and impersonal. It is a deal from which both parties derive an advantage. They mutually contribute to each other’s living. But it is different with a bureaucratic organization. There the nexus between superior and subordinate is personal. The subordinate depends on the superior’s judgment of his personality, not of his work. As long as the office clerk can rely on his chances of getting a job with private business, this dependence cannot become so oppressive as to mark the clerk’s whole character. But it is different under the present trend toward general bureaucratization.
The American scene until a few years ago did not know the bureaucrat as a particular type of human being. There were always bureaus and they were, by necessity, operated in a bureaucratic way. But there was no numerous class of men who considered work in the public offices their exclusive calling. There was a continuous change of personnel between government jobs and private jobs. Under civil service provisions public service became a regular career. Appointments were based on examinations and no longer depended on the political affiliation of the applicants. Many remained in public bureaus for life. But they retained their personal independence because they could always consider a return to private jobs.
It was different in continental Europe. There the bureaucrats have long formed an integrated group. Only for a few eminent men was a return to nonofficial life practically open. The majority were tied up with the bureaus for life. They developed a character peculiar to their permanent removal from the world of profit-seeking business. Their intellectual horizon was the hierarchy and its rules and regulations. Their fate was to depend entirely on the favor of their superiors. They were subject to their sway not only when on duty. It was understood that their private activities also—and even those of their wives—had to be appropriate to the dignity of their position and to a special—unwritten—code of conduct becoming to a Staatsbeamter or fonctionnaire. It was expected that they would endorse the political viewpoint of the cabinet ministers who happened at the time to be in office. At any rate their freedom to support a party of opposition was sensibly curtailed.
The emergence of a large class of such men dependent on the government became a serious menace to the maintenance of constitutional institutions. Attempts were made to protect the individual clerk against arbitrariness on the part of his superiors. But the only result achieved was that discipline was relaxed and that looseness in the performance of the duties spread more and more.
America is a novice in the field of bureaucracy. It has much less experience in this matter than the classical countries of bureaucracy, France, Germany, Austria, and Russia, acquired. In the United States there still prevails a leaning toward an overvaluation of the usefulness of civil-service regulations. Such regulations require that the applicants be a certain age, graduate from certain schools, and pass certain examinations. For promotion to higher ranks and higher salary a certain number of years spent in the lower ranks and the passing of further examinations are required. It is obvious that all such requirements refer to things more or less superficial. There is no need to point out that school attendance, examinations, and years spent in the lower positions do not necessarily qualify a man for a higher job. This machinery for selection sometimes bars the most competent men from a job and does not always prevent the appointment of an utter incompetent. But the worst effect produced is that the main concern of the clerks is to comply with these and other formalities. They forget that their job is to perform an assigned duty as well as possible.
In a properly arranged civil-service system the promotion to higher ranks depends primarily on seniority. The heads of the bureaus are for the most part old men who know that after a few years they will be retired. Having spent the greater part of their lives in subordinate positions, they have lost vigor and initiative. They shun innovations and improvements. They look on every project for reform as a disturbance of their quiet. Their rigid conservatism frustrates all endeavors of a cabinet minister to adjust the service to changed conditions. They look down upon the cabinet minister as an inexperienced layman. In all countries with a settled bureaucracy people used to say: The cabinets come and go, but the bureaus remain.
It would be a mistake to ascribe the frustration of European bureaucratism to intellectual and moral deficiencies of the personnel. In all these countries there were many good families whose scions chose the bureaucratic career because they were honestly intent on serving their nation. The ideal of a bright poor boy who wanted to attain a better station in life was to join the staff of the administration. Many of the most gifted and lofty members of the intelligentsia served in the bureaus. The prestige and the social standing of the government clerks surpassed by far those of any other class of the population with the exception of the army officers and the members of the oldest and wealthiest aristocratic families.
Many civil servants published excellent treatises dealing with the problems of administrative law and statistics. Some of them were in their leisure hours brilliant writers or musicians. Others entered the field of politics and became eminent party leaders. Of course, the bulk of the bureaucrats were rather mediocre men. But it cannot be doubted that a considerable number of able men were to be found in the ranks of the government employees.
The failure of European bureaucracy was certainly not due to incapacities of the personnel. It was an outcome of the unavoidable weakness of any administration of public affairs. The lack of standards which could, in an unquestionable way, ascertain success or nonsuccess in the performance of an official’s duties creates insoluble problems. It kills ambition, destroys initiative and the incentive to do more than the minimum required. It makes the bureaucrat look at instructions, not at material and real success.